Demand, Supply, and

Market Equilibrium
Demand
• The various amounts of a
product that consumers
are willing and able to
purchase at various prices
during some specific period
• Demonstrated by demand
schedule and demand
curve

2
Demand in Output Markets
ANNA'S DEMAND
• A demand schedule is a
SCHEDULE FOR table showing how much
TELEPHONE CALLS of a given product a
QUANTITY household would be
PRICE DEMANDED willing to buy at different
(PER
CALL)
(CALLS PER
MONTH)
prices.
$ 0 30 • Demand curves are
0.50 25
3.50 7
usually derived from
7.00 3 demand schedules.
10.00 1
15.00 0
The Demand Curve
ANNA'S DEMAND
SCHEDULE FOR
• The demand curve is a
TELEPHONE CALLS graph illustrating how
PRICE
QUANTITY
DEMANDED
much of a given product
(PER
CALL)
(CALLS PER
MONTH)
a household would be
$ 0
0.50
30
25
willing to buy at different
3.50 7 prices.
7.00 3
10.00 1
15.00 0
Movement along a Curve
P5 D1

4 Movement along

Price ($ per unit)

a demand curve
3

Change in
2
quantity demanded

1
D1

0 10 20 30 40 50 60 70 80
Quantity demanded Q
.
5
From Household to Market Demand
• Demand for a good or service can be defined
for an individual household, or for a group of
households that make up a market.
• Market demand is the sum of all the
quantities of a good or service demanded per
period by all the households buying in the
market for that good or service.
From Household Demand to Market
Demand
• Assuming there are only two households in the
market, market demand is derived as follows:
Total Revenue:
(Price x Qty)

Find out the

price at which
the seller
makes
maximum TR.
Law of Demand
• The inverse relationship between the price and the quantity
demanded of a good or service during some period of time

.
9
Determinants of Household Demand
A household’s decision about the quantity of a particular output to demand
depends on:

• The price of the product in question.

• The income available to the household.
• The household’s amount of accumulated wealth.
• The prices of related products available to the
household.
• The household’s tastes and preferences.
• The household’s expectations about future income,
wealth, and prices.
Related Goods and Services

• Normal Goods are goods for which

demand goes up when income is higher
and for which demand goes down when
income is lower.
• Inferior Goods are goods for which
demand falls when income rises.
Related Goods and Services

• Substitutes are goods that can serve as

replacements for one another; when the price
of one increases, demand for the other goes up.
Perfect substitutes are identical products.
• Complements are goods that “go together”; a
decrease in the price of one results in an
increase in demand for the other, and vice
versa.
Shift of Demand Versus Movement Along a
Demand Curve

• A change in demand is
not the same as a change
in quantity demanded.
• In this example, a higher
price causes lower
quantity demanded.
• Changes in determinants
of demand, other than
price, cause a change in
demand, or a shift of the
entire demand curve, from
DA to DB.
The Impact of a Change in
Income
• Higher income • Higher income
decreases the demand increases the demand
for an inferior good for a normal good
The Impact of a Change in
the Price of Related Goods
• Demand for complement good
(ketchup) shifts left

• Demand for substitute good (chicken)

shifts right

• Price of hamburger rises

• Quantity of hamburger
demanded falls
Supply
• The various amounts of a product that producers are willing and able
to supply at various prices during some specific period
• Demonstrated by the supply schedule and supply curve

.
16
Law of Supply
• Direct relationship between the price and quantity
supplied
• Increased price causes increased quantity supplied
• Decreased price causes decreased quantity supplied

17
Market Supply
Price Quantity supplied

per unit($) per week

a 5 12 000
b 4 10 000
c 3 7 000
d 2 4 000
e 1 1 000

18
Supply Curve
P
5
a S1

b
4

Price ($ per unit)

c
3

d
2

e
1
S1
0 Q
2 4 6 8 10 12 14 16
Quantity supplied (000/week)

19
From Individual Supply
to Market Supply
• The supply of a good or service can be defined for an
individual firm, or for a group of firms that make up a
market or an industry.
• Market supply is the sum of all the quantities of a
good or service supplied per period by all the firms
selling in the market for that good or service.
Market Supply
• As with market demand, market supply is the
horizontal summation of individual firms’ supply
curves.
Determinants of Supply
• The price of the good or service.
• The cost of producing the good, which in turn
depends on:
• The price of required inputs (labor, capital, and
land),
• The technologies that can be used to produce
the product,
• The prices of related products (joint supply).
• Taxation and Subsidies
A Change in Supply Versus
a Change in Quantity Supplied

• A change in supply is
not the same as a
change in quantity
supplied.
• In this example, a higher
price causes higher
quantity supplied, and
a move along the
demand curve.
• In this example, changes in determinants of supply, other
than price, cause an increase in supply, or a shift of the
entire supply curve, from SA to SB.
A Change in Supply Versus
a Change in Quantity Supplied

To summarize:
Change in price of a good or service
leads to

Change in quantity supplied

(Movement along the curve).

Change in costs, input prices, technology, or prices of

related goods and services
leads to

Change in supply
(Shift of curve).
Market Equilibrium
• The operation of the market depends
on the interaction between buyers and
sellers.
• An equilibrium is the condition that
exists when quantity supplied and
quantity demanded are equal.
• At equilibrium, there is no tendency for
the market price to change.
Market Equilibrium
• Only in equilibrium is
quantity supplied equal
to quantity demanded.

• At any price level

other than P0, the
wishes of buyers
and sellers do not
coincide.
Market Disequilibrium
• Excess demand, or shortage,
is the condition that exists
when quantity demanded
exceeds quantity supplied at
the current price.

• When quantity demanded

exceeds quantity
supplied, price tends to
rise until equilibrium is
restored.
Market Disequilibrium
• Excess supply, or surplus, is
the condition that exists
when quantity supplied
exceeds quantity demanded
at the current price.

• When quantity supplied

exceeds quantity
demanded, price tends to
fall until equilibrium is
restored.
Increases in Demand and Supply

• Higher demand leads to higher • Higher supply leads to lower

equilibrium price and higher equilibrium price and higher
equilibrium quantity. equilibrium quantity.
Decreases in Demand and Supply

• Lower demand leads to • Lower supply leads to higher

lower price and lower price and lower quantity
quantity exchanged. exchanged.
Relative Magnitudes of Change

• The relative magnitudes of change in supply and

demand determine the outcome of market equilibrium.
Relative Magnitudes of Change

• When supply and demand both increase, quantity

will increase, but price may go up or down.